The 2016 COLA for Retirees is Zero Right Now

This Friday, federal retirees will receive the latest data point in the calculation of the much-anticipated 2016 cost-of-living adjustment.

The Bureau of Labor Statistics on July 17 will release the Consumer Price Index for June. While the numbers for July, August and September are the most important figures in the COLA calculation, June’s figure will indicate where the trend is heading going into the third quarter.

So far, things aren’t looking so good. Based on the current data, there won’t be a COLA increase for 2016. But things can change over the next three months.

The annual COLA for all retirees is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price changes in food, housing, gas and other goods and services. The cost of living rose 0.6 percent in May, but the CPI-W has decreased 0.6 percent over the last 12 months to an average index of 232.908.

Why does that matter? Because it’s less than the average for the third quarter of 2014 (234.242), which is an important component in the COLA equation. The July, August and September 2015 numbers could bring up that 232.908 average, but it’s too soon to tell. The exact cost-of-living adjustment for next year won’t be known until October when all the numbers are in.

The average of the July, August and September 2015 consumer price numbers, along with the average figure from the third quarter of 2014, is used to calculate the 2016 COLA. The annual COLAs are based on the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. In this case, that is 2015 and 2014.

If there’s no percentage increase, there’s no COLA.

Retirees received a 1.7 percent COLA increase for 2015, a 1.5 percent boost for 2014, a 1.7 percent increase for 2013 and a 3.6 percent bump for 2012. The 2012 COLA increase was the first since October 2008 (which took effect in 2009).

According to the formula, if there is an increase, here’s how it plays out:

If the full COLA increase is 3 percent or higher, as it was for 2012, then retirees under the Federal Employees Retirement System receive 1 percentage point less than the full increase. So FERS retirees received a 2.6 percent bump for 2012. If the COLA falls between 2 percent and 3 percent, then FERS retirees would receive 2 percent. If the increase is less than 2 percent, as it is in 2015, FERS retirees receive the same as retirees under the Civil Service Retirement System.

Employees still working for the federal government do not receive a COLA, but they may end up doing better than retirees. Federal workers at the moment are on track to receive a 1.3 percent pay raise in 2016. 

For a history of COLAs and federal employee pay raises going back to 1970, review this Retirement Planning column from Tammy Flanagan, the senior benefits director for the National Institute of Transition Planning Inc.

(Image via Jezper / Shutterstock.com)